Dapper Labs Agrees to Pay $4 Million to Settle Securities Lawsuit

Dapper Labs Agrees to Pay $4 Million to Settle Securities Lawsuit. Image: Forbes

Dapper Labs - the entity behind the Flow blockchain and the "NBA Top Shot Moments" collection - has reached an agreement with plaintiffs who filed a lawsuit against the company and its co-founder, Roham Gharegozlou. The settlement, which involves a payment of $4 million, is pending approval from a New York court.

The lawsuit originated in 2021, when a group of investors accused Dapper Labs' flagship product, the "NBA Top Shot Moments" NFT collection, of being unregistered securities. They argued that the value of the NFTs would increase over time with the project's popularity. Furthermore, Dapper Labs was accused of preventing investors from withdrawing funds for "several months" to maintain total value locked (TVL) and not allowing Moments to be traded on external NFT platforms at the time of the lawsuit.

Dapper Labs has consistently denied the allegations, asserting that their NFTs are not securities but digital basketball cards. The NBA Top Shot Moments collection, according to Dapper Labs, digitizes notable moments in basketball and is created in partnership with the National Basketball Association (NBA).

In February of the previous year, a US court allowed the lawsuit to proceed, stating that Dapper Labs' NFTs did not pass the Howey Test, a standard used by US authorities to determine if an asset qualifies as an investment contract. However, the court's decision did not make any charges against Dapper Labs but merely acknowledged that the lawsuit had sufficient grounds to be heard in the Southern District of New York.

Today, the two parties reached a settlement. Dapper Labs agreed to pay $4 million to resolve the dispute, while the plaintiffs agreed to cease claims that Dapper Labs' NFTs are securities. The settlement funds will cover legal fees and other expenses.

Additionally, Dapper Labs committed to making several business changes, including mandatory training programs for employees to ensure compliance with federal securities laws, improving payment and withdrawal speeds, and relinquishing control over the remaining FLOW tokens by transferring them to the Flow Foundation to ensure the Flow ecosystem's decentralization.

Although this settlement is between Dapper Labs and the investors and not with regulatory authorities, it is seen as a significant step toward legal clarity regarding the classification of NFTs as securities.

In conclusion, CEO Gharegozlou emphasized that no regulatory body has yet declared their NFTs as securities. In April 2023, Fortune reported that the SEC had investigated Dapper Labs but concluded the investigation in September without making any specific determinations.